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New Demographic Features in Chin

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					       Consulate     General   of    Switzerland     in   Shanghai       Commercial      Section




                                    ISSUE NO.4      November 2004

                    New Demographic Features
     in China and Shanghai Region: Socio-Economic Challenges
By the end of 2003, China’s population stood at 1.29 billion, accounting for 21% of the world’s
total population. Its family planning (one child) policy has been implemented since the end of the
1970s and has led to a reduction of 300 million births during the last thirty years, with the birth rate
continuing to decline. In 2003, the net population increase was 7.7 million with a birth rate of
12.41‰ and a natural growth rate of 6.01‰, compared to an increase of 23 million persons per year
at the end of the 1960s and early 1970s. As the most populous country in the world, China only has
7% of the world's arable land, 7% of fresh water, 3% of the forests and only 2% of oil resources.
The strong population-control efforts of the government have supported its rapid economic growth
recent years.

As a result of this birth-control policy, within 30 years the demographic characteristics have now
changed from a “high birth rate, low death rate and high growth rate” to a “low birth rate, low death
rate and low growth rate”, a transformation that took many developed countries nearly one century
to complete.

However, this fast transformation has also led to disadvantages in the population structure, mainly
in two respects – an ageing population and an imbalance in the sex ratio, which will lead to new
problems and challenges, but at the same time, will also create new potential business opportunities.

I.         The Ageing Population

1.1.       General Situation

China has become the country with the fastest ageing process in the world and the largest
population of senior citizens. Currently China has more than 130 million senior citizens who are
above 60, more than 10 percent of the total population. By the middle of this century senior citizens
in China will be exceeding 400 million, making up one fourth of the total population, whereas it
takes twice that long for developed countries to cover the same process.

Generally speaking, the declining fertility and the increasing longevity have contributed to this
growing “white tide”. Over the last fifty years, life expectancy of the Chinese population has kept
growing, from less than 40 years before 1949 to 71.4 years at present, approaching levels in
developed countries. The population pyramids below show the ageing process is changing China’s
pyramid by growing larger and larger segments in the higher age brackets.




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       Consulate     General   of    Switzerland   in   Shanghai      Commercial     Section




1.2.       Social Security System

1.2.1. Basic Old-Age Insurance

The growing ageing population has put mounting pressure on China’s pension system. According to
the China Statistics Yearbook 2003, pension payment at present is drawn from the current year’s
income, an accounting-on-cash-basis system that relies on a relatively young population structure.
However, China will not have a sufficiently large young workforce to pay the social benefits for
retirees with the rising burden of dependency in the near future.


                                    Dependency Ratio China

                      70
                      60                            59   61
                      50                      50
                            46          44
                      40 36       38                                   Young
                      30       27    28    28          3
                                                 29 0 30 1
                                                  3                    Old
                                            22                         Total
                      20              16
                      10 10     11
                       0
                         2000 2010 2020 2030 2040 2050



In 1997, the Chinese government unified the basic old-age insurance system for enterprise
employees in urban areas across the country by implementing a social-pool-plus-personal-accounts
scheme. The government, instead of the enterprises, took the responsibility to pay pensions for the
retirees. However, there were many employees retired before the start of the new system as well as

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        Consulate    General    of   Switzerland    in   Shanghai       Commercial     Section
many laid-off workers during the SOE reform whose personal accounts were empty. The
government had to inject fiscal subsidies to pay for them during the transitional period. Meanwhile
the contribution revenues from individual accounts were also diverted to pay for the deficits in the
social pooling thus leaving the personal accounts empty as well. Therefore China’s pension fund
has so far been in deficit since the very beginning. The current annual deficit is estimated as around
UD$ 20 billion. Till 2010, the accumulated deficit will reach UD$ 110 billion, according to a report
by McKinsey (Pitsilis, 2002).

1.2.2      National Social Security Fund

In an effort to build up reserves for future pension payments, China set up a National Social
Security Fund in 2002. By the end of June this year, the total fund assets amounted to 143.2 billion
Yuan (UD$ 17.3 billion) – but still not sufficient compared to the future needs of China’s ageing
society. President Xiang Huaicheng of the National Council of the Society Fund (NCSSF) said
earlier this year that China’s pension problem could basically be solved only if the fund reaches 2
trillion Yuan (UD$ 240 billion). Following his comments, Xiang announced a proposal on 17th
September this year, that more than 12 trillion Yuan (UD$ 1.4 trillion), nearly one-tenth of China’s
State assets, will be transferred to the Social Security Fund within five years. The proposal was a
response to the white paper titled “China’s Social Security and Its Policy” issued by the Information
Office of China’s State Council on 7th September, the first-ever white paper in this field that showed
the effort by the Government to improve the country’s social security system.

1.2.3      Enterprise Annuity

In addition to the compulsory basic old-age insurance, the Chinese government has encouraged the
enterprises with suitable conditions to set annuities for their employees. In 1994, the National
People’s Congress promulgated the Labour Law stating that employers may sponsor supplementary
pension insurance for their employees in their own context. Both enterprises and individuals will
contribute to this annuity, which will be accumulated wholly for the specific purpose of retirement
allowance and managed in the form of a personal account. Therefore a preliminary outline of
China’s pension system was formed: compulsory basic pension insurance including social-pooling
fund and personal accounts, occupational complementary pension (enterprise annuity) and personal
savings. With the reform of the pension system, in the longer term the personal accounts would be
separated from the basic pension insurance and converged into enterprise annuities. The enterprise
annuities would become the most important source of income for many retirees. But by the end of
2003, only about 7 million people have taken part in the enterprise annuity project, accounting for
less than 10% of the basic pension insurance contributors in the country.

1.3        Social Security Fund Market

Both domestic and foreign companies have shown great interest in China’s social security fund
market, lured by the market potential and the growing demand for professional services in this
sector.

The National Council for Social Security Fund released the long awaited result for the 2nd round
selection of fund management companies in late October to add another four companies together
with the previous six as its fund investment managers to help to run the UD$ 17.3 billion strategic
reserve social security fund. Several joint venture fund management companies, including ABN
AMRO Xiangcai Fund Management and Fortune SGAM Fund Management had applied for the
position, but failed. So far, there are two joint-venture companies among the ten approved fund
managers.

As part of China's commitment to the World Trade Organisation (WTO), foreign institutions are
allowed to do securities and fortune management in the country. But the limits put on these
activities are still very strict.

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      Consulate     General   of   Switzerland      in   Shanghai       Commercial     Section


The second round competition began with the enterprises' annuity fund, which is operated in
accordance with the market mechanisms. According to the Administration of Enterprises Pension
Funds trial procedures started effectively from 1st May 2004. The Fund is now worth 50 billion
Yuan (US$6 billion) and is expected to grow to 100 billion Yuan (US$12 billion) in a few years.

Within China’s WTO commitment the annuities market will be open to foreign insurers at the end
of this year. A new regulation for the enterprises annuities fund management is expected to be
released in November this year, which will set up the exact market entry thresholds for fund
managers and clarify the standards and liabilities in the investment management.

Chinese fund management companies are competing strongly to win the licences to manage the
enterprises pension fund. Technically speaking, it is not much of a problem for a foreign company
to enter the market, as there is a high demand for quality and professional investment management
service as people are much concerned about a stable and good return of their pension fund.

This year’s policy loosening allowed qualified domestic insurers to invest their foreign exchange
assets overseas. A government official said recently that a new regulation allowing social security
funds to invest in overseas securities will also be released next month.

II.        Gender Imbalance

According to the fifth national census conducted in 2000, the ratio of new-born males per 100
females in China has reached 117, much higher than the normal level of between 103 to 107. In
some provinces, the ration topped at 100:130.

The one-child policy and Chinese preference for male heirs have played a major part in this
disparity, while prenatal sex selection of unborn children is the main reason for the result.
Technology, such as ultrasonic scanning to predetermine the sex of an unborn baby, still leads to
the abortion of unborn females in some cases.

Many reasons lead to the outmoded notion of male preference. As elderly people in rural areas are
not covered currently by the social security system, they mainly rely on the family for old-age
support. Secondly, young male labour force is still a great asset in agricultural regions due to the
backward productivity of agriculture. Meanwhile, China’s traditional male-oriented culture and
differentiated treatment of different genders in real life also contribute to the biased mentality.

Such disparity will not only hurt female new-borns with unfair treatment, but will also raise a series
of social problems. It is estimated that by year 2020, 40 to 50 million Chinese male aged 20-40 will
not be able to find wives. It is feared already now that this unbalance will probably lead to casual
sex and human trafficking.
Moreover, these large numbers of unmarried, often undereducated young men form part of the
floating population moving between China’s urban cities. They also are prone to engage in high-
risk sex, which leads to increased levels of sexually transmitted diseases.
In 2003, the HIV-positive population in China was 840,000. The disease is now at the critical point
of spreading from the high-risk to the general population. Without strongly effective measures, the
infected numbers will increase to 10 million persons by the year 2010. This serious situation
coinciding with the high-risk population of unmarried men will pose a huge treat to China’s
sustainable economic growth.




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        Consulate     General    of   Switzerland     in      Shanghai   Commercial     Section

III.       Situation in Shanghai
3.1        Demographic Characteristics
As China’s economic, financial, trade and shipping centre, Shanghai accounts for 0.06% of the
country’s total area, but its population, standing at 13.42 million in 2003, accounted for 1.27% of
the country’s total.
The natural demographic change in Shanghai has exclusively sustained negative growth for the
consecutive 11 years since 1993. Thus Shanghai is the first city in China that has entered the stage
of an ageing society, facing the dual pressure of ageing and an advanced ageing structure of the
population. The city’s average life expectancy was 79.8 years old in 2003, much higher than the
average 71.4 years life expectancy in China. By the end of 2003, the senior citizens of age 60 and
above reached 2.5467 million, accounting for 18.98% of Shanghai registered permanent residents
and those of age 65 and above hit 1.9949 million, accounting for 14.87%, which indicates that
ageing in the city has reached the average level of developed countries. It is forecast that in the
coming period of time, the percentage of Shanghai’s ageing of population will further grow.
Despite of the negative natural growth rate, the overall population in Shanghai has sustained rapid
expansion, owing to the constant influx of a migrant population. The number increased from 1.06
million in 1998 to 3.87 million in 2002, ranking second in the country, just after Guangdong
Province. In order to further attract a young and skilled workforce, Shanghai has launched a new
residence permit policy since 1st October 2004, giving migrant workers with fixed labour contract in
Shanghai nearly the same treatment as registered citizens in the fields of education, insurance and
pension plans.
3.2        Challenges and Opportunities
3.2.1      Market Potential for Products for Elderly People
An investigation by the China Research Centre on Ageing showed that 42.8 percent of ageing
people in urban districts possess savings. The percentage in Shanghai is much higher with its per
capita GDP hitting US$ 5,642 in 2003, ranking number one in mainland China. Most of the savings
and the accumulated retirement pension will pour into the market.
Consequently the exploration of products for the market created by elderly people has drawn the
attention of many business people. Anti-ageing products, tonics, garments and other age-related
products appear on the counters. New vacations and services designed especially for ageing people
such as tourism and gymnasia have emerged as well. However, the quantity, quality and style of the
products still lag behind those for women and children.
Due to the high diversity of China, there is no unified single Chinese market, but many different
markets in different areas for different types of consumers. Elderly people in Shanghai tend to pay
more attention to the quality and taste of life, therefore there is also demand on high quality medical
service, cellular therapy, high-end cosmetics and garments as well as overseas tourism. Additionally,
the family size in Shanghai has tended to miniaturisation with only 2.8 members each family in
2000. Unlike traditional Chinese family, many elderly people in Shanghai live by themselves. It is
forecast that small apartment with elderly-caring facilities and service will be in large need in the
near future.
3.2.2      Shortage of Migrant Workers in Some Areas
Since the end of the Spring Festival this year, many cities in China, especially in the Pearl River
Delta, are facing the problem of lacking labour, both in numbers and in skills.
Due to the Hukou (household registration) system, migrant workers will not be accepted as full
members of urban communities even if they have worked for years in the cities. Therefore they will
not have the same access to jobs, education, health services, insurance and social welfare benefits.

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        Consulate    General    of      Switzerland   in   Shanghai      Commercial     Section
In some areas the working conditions of migrant workers are very poor. Unpaid wages, increased
cost of living in the cities, as well as lack of basic employment benefits are all contributing factors
for the shortage of this labour force.
Another reason for the migrant workers not to return to the cities is the new policy of the
government directed at raising rural incomes and improving the economic situation in the
countryside.
So far the situation in the Yangtze River Delta is better. A series of new measures has been taken by
the authorities to protect the rights of migrant workers. The average monthly payment in the Yangtz
River Delta is about 8.5% higher than the national average. As a result, migrant workers “vote with
their feet”. The movement has severely hit the manufacturing industry in some areas.

Shanghai has a relatively strong government, proven by its impressive performance in the fight
against the SARS disease in 2003. The series of new policies published by the government, such as
the new residence permit policy, as well as insurance and pension plans for migrant workers, has
created a comparatively open and fair environment and have attracted higher-skilled workers. As a
result, it is not easy any more to find skilled employees on different management levels in
neighbouring cities like Suzhou and Ningbo, although business costs are lower there.

However, with the process of an ageing population, it is a long-term task for the government to
attract and provide job-training for a large pool of skilled workforce, both urban and migrant, and
constantly improve its productivity.

3.2.3      High Density of Population

The population density in Shanghai remains the highest in China with 2,588 people per square
kilometre. In addition, the population is unevenly distributed. The villages in the suburban areas are
small and the residents are too scattered, unfavourable to the rural modernisation drive. On the other
hand the density in the downtown areas is too high. There are over 50,000 people per square
kilometre in Huangpu, and 40,100 people per square kilometre inside the inner ring. The strongly
concentrated population in the downtown areas has resulted in considerable environmental and
severe transportation problems.

IV.        Conclusion

China has grasped the demographic bonus for development over the last two decades. The huge
pool of labour force has provided the necessary entry-level man-power for the industry when China
started taking off after 1978. Furthermore, large amounts of bank savings deposited by the younger
population are continuously supplying the heated investment needed for development. In the
meantime, increasing incomes and relatively low dependency rates encourage spending on housing,
automobiles, education, tourism and other services. However, China’s favourable demographics
will start to turn against its booming economy within several decades when the country’s
population is getting older. Related authorities have already put the task of seeking solutions of the
demographic changes at the top of their agenda. The Government has already shown its strong
effort for better education and health care. It is very likely that this huge human capital investment
will help China to work its way through the age structure. Nevertheless, the per capita education
duration in China is now only 7.85 years, a level of education achieved by the U.S. 100 years ago.
There is still a long way to go, before trained labour in sufficient numbers and sufficient quality
should help the country to go on with its economic and social development.



Stella Nie


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